Veterans can use their VA benefit at any time. Even veterans that originally used conventional financing can refinance their loan into a VA loan. Keep reading to learn how you can do it too.
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The first step in using your VA benefits is to verify your entitlement. The lender needs to know that you have the VA guarantee on your loan. Each veteran receives basic and bonus entitlement once they meet the service requirements set by the VA. This means that the veteran had an honorable discharge and served one of the following:
- 90 days as a regular military member during wartime
- 181 days as a regular military member during peacetime
- 6 years in the National Guard or Reserves
If you served one of these, then you may have basic entitlement of $36,000 and bonus entitlement of $113,275. This helps you obtain a loan amount up to $453,100 (the conventional amount), without a down payment. If you borrow anything more than that, you may need a down payment.
In the case of a refinance, you won’t need any equity in the home. You can refinance 100% of the home’s value up to $453,100 with full entitlement.
Proving That You Qualify for the VA Loan
The next step is proving that you qualify for the VA loan. Because you are refinancing from another type of loan, you’ll have to go through the full verification process. This includes:
- A credit score of at least 620
- A maximum total debt ratio of 43%
- Adequate disposable income to meet the requirements for your area and family size
- No defaulted federal loans on your credit report
- Proof that you will occupy the home as your primary residence
If you meet these requirements, you may be eligible for a VA loan.
Finding a Lender
Keep in mind that the VA doesn’t write or fund loans. They only guarantee them. This means that they promise the VA approved lender that they will pay them back any money they lose if you default on the loan.
The VA’s guaranty is equal to 25% of your loan amount, up to the maximum $453,100. If you’ve never used any of your entitlement, then you have full entitlement. If you have used some of it and the loan is still outstanding or you still own the home, you’ll only have entitlement left that you didn’t use with the original mortgage.
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The VA will only guarantee the amount of entitlement you have left. In this case, we’ll assume you never used it. This means the VA will guarantee the lender up to $113,275, or a loan amount of $453,100.
Some lenders have what they call lender overlays on the guidelines. These are additional rules the lender requires on top of what the VA states. This helps lenders reduce the risk of foreclosure on a home that you are putting no money down on.
Now if you already have some equity in the home and you refinance out your conventional loan, you may have some equity. There isn’t a rule that states you must take all of the equity out of your home when you refinance from a conventional loan. Any equity you have in the home can help you stay ahead as it can be hard to gain equity in a home when you don’t make a down payment.
A Cash Out Refinance
When you refinance your conventional loan into a VA loan, the VA considers it a cash-out refinance. This doesn’t mean much to you with the exception that you may pay a slightly elevated interest rate. Luckily, VA interest rates are typically low to start with, so increasing it a little bit will still be acceptable for most borrowers.
Don’t forget, with the VA loan, you will pay a funding fee at the closing. This is a percentage of your loan amount that you pay directly to the VA. As a regular member of the military, you will pay 2.15% of the loan amount. If you are a veteran of the Reserves or National Guard, you’ll pay 2.4% of the loan amount. If you don’t have the cash up front, you may be able to wrap it into your loan amount.
No Monthly Mortgage Insurance
Where you may benefit the most when refinancing out of a conventional loan into a VA loan is the lack of mortgage insurance. The VA doesn’t require any mortgage insurance despite the fact that you borrow 100% of the home (or up to it). This can save you thousands of dollars over the life of the loan.
Refinancing your conventional loan into a VA loan may save you some money. This is especially true if you are paying PMI on your conventional loan. The VA loan has flexible guidelines and low interest rates. If you haven’t used your VA benefit yet, it may be worth considering.
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